Halliburton hurting in Brazil project

LisaSanders

DALLAS (CBS.MW) -- While Halliburton's work in Iraq and its ties to the White House dominate political debate, the company is fighting another battle in Brazil, where soaring costs on a big offshore oil project have been slowly bleeding its bottom line.

For the fifth time in six quarters, Houston-based Halliburton
HAL, -1.05%
on Friday took a charge on its Barracuda-Caratinga project to account for costs disputes and project delays. See full story.

On a conference call Friday, the company said it was doing all it could to minimize future risk. But the ongoing and unexpected charges have some analysts questioning Halliburton's credibility.

"Will they ever make money off the project? No," said Jim Wicklund, oil service analyst at Banc of America Securities, who has a "buy" recommendation on the stock. "The entire goal now is to minimize future losses and finish this as quickly as possible."

The project, originally expected to generate $2.6 billion in revenue, has left Halliburton with a total after-tax loss of $472 million.

Kellogg Brown & Root, the Halliburton engineering and construction arm that's been under scrutiny for its work in Iraq, entered into a contract in June 2000 with Petrobras
PBR, -15.75%
to develop the Barracuda and Caratinga crude fields off the coast of Brazil.

One of the main problems has been a loss in productivity, Wicklund said.

"It's a government project, so 'the slower we go, the longer we work,'" he added. "That's a problem with a lot of international projects. With $310 million in additional costs, it seems to be working. It's the responsibility of KBR to make sure this doesn't happen."

Kevin Wood, senior oil-service analyst at Susquehanna Financial Group, believes the real problem is that KBR signed a poor contract.

"Petrobras was allowed to come back and make numerous changes, and each time Halliburton had to go back and make the change and that costs money," he said, adding that even the company would likely characterize the project as an "unmitigated disaster."

Randy Harl, KBR's chairman, said on the conference call said that the project is now 87 percent complete. Harl was moved out of his roles as president and chief executive of KBR Friday and replaced by Andrew Lane. See full story.

The move was necessary for KBR to "reestablish some credibility and to add some credibility to the effort," Wicklund said. "They added Andy [Lane] to the senior management team because of concerns about the existing management's capability and credibility."

Wicklund and Wood, who rates Halliburton the equivalent of a "buy," differ about what the next couple of quarters will bring.

Despite the current problems, many analysts are positive about Halliburton's future once the company finally resolves its asbestos settlement. After that, Wicklund and others expect Halliburton to begin to sell off the parts of KBR it doesn't want to keep.

"I would be shocked if we saw a charge [from Barracuda-Caratinga] in the next two quarters," Wood acknowledged. "But all I heard them say is that they think they've estimated the future cost for the project the best they can."

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